DISTRIBUTION CENTERS ARE SPREADING

Increase in distribution centers a real estate phenomenon

A crane moves containers at a terminal near where Amazon is developing a distribution center in Haslet, Texas. Major storms and other factors have
prompted some companies to modify the popular just-in-time style of doing business.

THE NEW YORK TIMES / BRANDON THIBODEAUX

By MATT HUDGINS, The New York Times

Published: Monday, February 25, 2013 at 1:00 a.m.

Last Modified: Saturday, February 23, 2013 at 4:43 p.m.

Hurricane Sane is long past, but in its wake, retailers and others are modifying "just-in-time" inventory practices and carrying appropriate levels of merchandise.

The shift to "just-in-case management" has led logistics companies to add distribution hubs nationwide, according to CoStar Group, a leading real estate research firm in Washington, D.C.

In turn, the hubs are sparking real estate opportunities in markets off established distribution paths and prompting growth in unorthodox markets.

At a time when extreme weather and other events are more the norm and not the exception worldwide, just-in-case planning should help retailers keep merchandise on store shelves if their supply chains become disrupted.

The trend comes in response to vulnerabilities in just-in-time supply chains, said Rene Circ, CoStar's director of industrial research.

Since the 1990s, just-in-time has reduced costs for companies by keeping smaller inventories on hand, as technology has enabled retailers and manufacturers to closely track and ship items to replace merchandise sold. It has also reduced transportation costs.

By combining just-in-case with just-in-time strategies, Circ said, companies are striking a balance between "carrying the minimum inventory possible, yet never running out of things, because inventory equals cost."

As an example, Ranger Steel, a Houston company that is among the largest privately owned steel-plate distributors nationwide, recently expanded its network of distribution centers.

Until the late 1990s, Ranger Steel regularly trucked heavy steel plates from its distribution center at the Port of Houston to customers throughout the U.S.

"For a long time, that concept worked like a charm," said Jochen Seeba, the company's vice president and chief operating officer.

"Then you started to see the spike in fuel pricing, and new governmental rules and regulations on insurance coverage for truck drivers that made truck transportation very expensive."

Adding distribution centers has cut overall delivery times because the company is now closer to customers.

Today, Ranger Steel has seven distribution centers, from which drivers usually deliver orders within 24 hours.

The more significant advantage is the ability to serve and retain customers better, Seeba said.

With just-in-time management, smaller on-site inventories put companies at greater risk of running out of merchandise.

Shaw Lupton, CoStar's senior real estate economist, said companies are trying to mitigate that risk by diversifying supply chains. He also notes there has been a slowdown in the rate at which the largest warehouse markets have captured market share over the past decade.

Some researchers say that retailers, in particular, face competitive pressures to establish distribution centers near major population centers. That's because many states -- including Florida -- are considering forcing online retailers to pay sales tax, a move that would level the field with brick-and-mortar stores.

In an effort to maintain their advantage, online retailers are increasingly offering rapid shipping from nearby distribution centers, Circ said.

"It's driving this reconfiguration of supply chains and the building of these large warehouses, not just in a few key markets, as it used to be, but a lot more widely spread" across the country, he said.

The closer to the customer that a company can transport its goods, the greater the efficiency and cost savings, said Tim Feemster, senior managing director at Newmark Grubb Knight Frank, a real estate company.

In late January, Amazon.com announced plans to open three fulfillment centers in Texas, each measuring more than 1 million square feet. Since 2011, it has unveiled plans for eight such centers, in unlikely locales such as Middletown, Del., and Dupont, Wash.

The supply chain redesign has introduced some new distribution paths, too. One of Amazon's fulfillment centers in Texas will be north of Fort Worth. Another will be in Coppell, near Dallas. A third is northeast of San Antonio.

But the shift is not for everyone.

Benjamin Butcher, chief executive of STAG Industrial in Boston, which owns and manages more than 29 million square feet of industrial space in 31 states, says many companies are reluctant to alter established supply chains.

"In the tenants we're dealing with, there is a lot of stability," he said.

"They don't tend to move unless there is a fairly strong and valid business reason to do it."

<p>Hurricane Sane is long past, but in its wake, retailers and others are modifying "just-in-time" inventory practices and carrying appropriate levels of merchandise.</p><p>The shift to "just-in-case management" has led logistics companies to add distribution hubs nationwide, according to CoStar Group, a leading real estate research firm in Washington, D.C.</p><p>In turn, the hubs are sparking real estate opportunities in markets off established distribution paths and prompting growth in unorthodox markets.</p><p>At a time when extreme weather and other events are more the norm and not the exception worldwide, just-in-case planning should help retailers keep merchandise on store shelves if their supply chains become disrupted.</p><p>The trend comes in response to vulnerabilities in just-in-time supply chains, said Rene Circ, CoStar's director of industrial research.</p><p>Since the 1990s, just-in-time has reduced costs for companies by keeping smaller inventories on hand, as technology has enabled retailers and manufacturers to closely track and ship items to replace merchandise sold. It has also reduced transportation costs.</p><p>By combining just-in-case with just-in-time strategies, Circ said, companies are striking a balance between "carrying the minimum inventory possible, yet never running out of things, because inventory equals cost."</p><p>As an example, Ranger Steel, a Houston company that is among the largest privately owned steel-plate distributors nationwide, recently expanded its network of distribution centers.</p><p>Until the late 1990s, Ranger Steel regularly trucked heavy steel plates from its distribution center at the Port of Houston to customers throughout the U.S.</p><p>"For a long time, that concept worked like a charm," said Jochen Seeba, the company's vice president and chief operating officer.</p><p>"Then you started to see the spike in fuel pricing, and new governmental rules and regulations on insurance coverage for truck drivers that made truck transportation very expensive."</p><p>Adding distribution centers has cut overall delivery times because the company is now closer to customers.</p><p>Today, Ranger Steel has seven distribution centers, from which drivers usually deliver orders within 24 hours.</p><p>The more significant advantage is the ability to serve and retain customers better, Seeba said.</p><p>With just-in-time management, smaller on-site inventories put companies at greater risk of running out of merchandise.</p><p>Shaw Lupton, CoStar's senior real estate economist, said companies are trying to mitigate that risk by diversifying supply chains. He also notes there has been a slowdown in the rate at which the largest warehouse markets have captured market share over the past decade.</p><p>Some researchers say that retailers, in particular, face competitive pressures to establish distribution centers near major population centers. That's because many states -- including Florida -- are considering forcing online retailers to pay sales tax, a move that would level the field with brick-and-mortar stores.</p><p>In an effort to maintain their advantage, online retailers are increasingly offering rapid shipping from nearby distribution centers, Circ said.</p><p>"It's driving this reconfiguration of supply chains and the building of these large warehouses, not just in a few key markets, as it used to be, but a lot more widely spread" across the country, he said.</p><p>The closer to the customer that a company can transport its goods, the greater the efficiency and cost savings, said Tim Feemster, senior managing director at Newmark Grubb Knight Frank, a real estate company.</p><p>In late January, Amazon.com announced plans to open three fulfillment centers in Texas, each measuring more than 1 million square feet. Since 2011, it has unveiled plans for eight such centers, in unlikely locales such as Middletown, Del., and Dupont, Wash.</p><p>The supply chain redesign has introduced some new distribution paths, too. One of Amazon's fulfillment centers in Texas will be north of Fort Worth. Another will be in Coppell, near Dallas. A third is northeast of San Antonio.</p><p>But the shift is not for everyone.</p><p>Benjamin Butcher, chief executive of STAG Industrial in Boston, which owns and manages more than 29 million square feet of industrial space in 31 states, says many companies are reluctant to alter established supply chains.</p><p>"In the tenants we're dealing with, there is a lot of stability," he said.</p><p>"They don't tend to move unless there is a fairly strong and valid business reason to do it."</p>